Fed Faces Toughest Decision Yet as Inflation Data Sparks Rate Hike Fears

Market-implied odds of a rate increase at next week's Federal Open Market Committee meeting jumped sharply after the inflation data, with fed funds futures traders now pricing in a roughly 90% chance of a hike.

Economists are divided over whether the Federal Reserve should raise interest rates at its upcoming meeting. RSM Chief Economist Joseph Brusuelas argued that the combined August Producer Price and Consumer Price Indices demand action from the Fed, citing three persistent supply shocks: war-induced energy disruptions, tariffs driving up prices, and the draw on commodities and finished goods to support artificial intelligence infrastructure buildout.

Brusuelas pointed out that rising distillate prices for gasoline, diesel, and jet fuel are no longer being absorbed through firm margin compression but are instead showing up in groceries and services throughout the economy. He contended the Fed needs to remove the three rate cuts implemented in late 2025 to slow an economy growing well above trend.

Not all economists agree, however. Parker Ross urged caution in interpreting the 0.51% month-over-month jump in supercore CPI that briefly sent September rate hike odds surging to nearly 100%. He noted that wireless phone services alone contributed 29 basis points, more than half of the supercore increase.

Marko Bjegovic took the sharpest stance against tightening, calling a potential rate hike 'a huge policy error'. He pointed out that core CPI stands at its lowest level since March 2021, meaning the Fed would be raising rates with core inflation at 5.5-year lows.